SPRU - Science Policy Research Unit

Distributed global financial systems for society

After five years of financial crisis, the Eurozone debt crisis is far from resolved. We still do not have satisfactory policies for dealing with the default of large banks let alone banking networks across national borders.

Poorly designed, or biased policies are not only economically inefficient and socially unfair, but eventually jeopardize stability and prevent the transition to a more sustainable economy. Furthermore, the global financial crisis and the subsequent EU crisis have revealed the tension between phenomena that occur at a global scale (e.g. corporate interests and economic imbalances among countries) and our ability to act—which is typically limited at a national level. The European Union thus requires a renewal of its policy processes - by providing a sound evidence for key future choices, and by involving citizens early on in the process to ensure that the common public interest is the key driver of the policies, rather than the interests only of specific groups.

The DOLFINS- Distributed Global Financial Systems for Society project aims to address the global challenge of improving the financial system to better serve society by placing scientific evidence and citizens’ participation at the centre of the financial policy process. This will in turn achieve crucial advances in reshaping the policy process to overcome the financial and political crisis faced by the EU.

The project will go beyond policy evaluation to investigate how to engage citizens in the early stage of the policy making process in order to better shape policies in the public interest. Currently, the policy making process tends to leave out, among the stakeholders, those most hurt by the policies. Worse, citizens themselves, disillusioned about their ability to have any say in the policy process and, more in general, about politics, have little incentive to get informed and to actively participate.

The project will provide quantitative tools to evaluate policies, with the aim of curtailing systemic risk and to fostering sustainable investment and to provide a better understanding of credit, risk and sustainable investments in an interconnected world.

Methodology

The project will lever on an array of interconnected methods: network models, algorithmic game theory, big-data technologies will all be combined with economic theory insights. This combination of methods can provide a more satisfactory understanding of credit, risk and sustainable investments in an interconnected world.

Based on the premise that financial stability and economic sustainability should go together, the project focuses on two crucial and interconnected policy areas:

Systemic risk and how to achieve financial stability

How to facilitate the long-term investments required by the transition to a more sustainable, more innovative, less unequal and greener EU economy.

The study addresses two kinds of actors that cut across these two policy areas of systemic risk and sustainable investments: (1) financial networks, (i.e. banking sector, insurance and shadow banking) as they are at the epicenter of the crisis but also potential providers of funding; and (2) pension funds, because population ageing in many countries may lead to a global pension crisis in the future, while instead pensions funds could be a source of sustainable investments.

Impact and outreach

Through active collaboration with the Young Foundation and Finance Watch, and an emphasis on ‘social innovation’ in finance, the project will look at how to help citizens to coordinate their actions in order to have a stronger voice on how their own bank and pension savings are managed, in particular to make investments more aligned with citizens’ societal values and with general societal goals.

In addition, using new computational methods, including agent based modeling, the project will provide new kinds of science-based support for policy-making in the face of complex challenges in an interconnected world.